2014 (10) TMI 939 - AT - Income Tax

Computation of capital gain on transfer of land and building - qualitative change in the title - termination of lease-hold rights on conversion of lease-hold land into free-hold land - LTCG OR STCG - period of holding as a lease-hold land - Held that - The capital gain accruing on sale of the land in question was a long-term capital gain as the land held and transferred was a long term capital asset since the said land was held for a period of more than 3 years. The nature of rights i.e. lease-hold or free hold is not a relevant consideration once the asset has been held by the assessee for a period of more than 3 years prior to the date of transfer. Thus we set aside the finding of the ld CIT(A) that the asset sold was a short-term capital asset and further hold that the land sold was a long-term capital asset and entire gain accruing on such transfer is taxable as a long-term capital gain only. See CIT Vs. Frick India Ltd 2014 (9) TMI 394 - DELHI HIGH COURT - Decided in favour of assessee Non-grant of indexation on the interest paid on borrowed funds - there was termination of lease hold rights on 29th March 1998 which was restored only on 06th August 2004 - Held that - The borrowing costs are recorded in the books of accounts year after year which have been accepted as such. It would be thus a fallacy to suggest that such borrowing cost in the shape of interest was not incurred for the development of the property. Further the year of capitalization under the building is also not a relevant consideration. The interest cost on year to year basis was capitalized under the head capital work in progress which was later transferred to building accounts. It is not in dispute that the borrowing costs have been incurred towards building as the AO has allowed the same as cost incurred while computing the capital gain. Thus there is no justification to contend that the indexation benefit will not be allowed on the borrowing cost. In the result the ground raised by the assessee are allowed.

Summary

Issues Involved:
1. Computation of capital gain on transfer of land and building.
2. Determination of the nature of the asset (short-term or long-term capital asset).
3. Eligibility for indexation on the interest paid on borrowed funds.
4. Initiation of penalty proceedings.

Detailed Analysis:

1. Computation of Capital Gain on Transfer of Land and Building:
The appellant company acquired leasehold industrial land in 1973 and constructed office premises, completed in 1999. Various improvements were made until 2005-06. In 2007, the land was converted to freehold, for which the appellant paid Rs. 3,89,89,196 to DDA. The appellant sold the land and building in 2007 for Rs. 30 crores, declaring long-term capital gains of Rs. 4,07,35,010. The AO, however, determined the long-term capital gain at Rs. 5,08,54,387, considering the freehold rights as a short-term capital asset and excluding indexation on borrowing costs.

2. Determination of the Nature of the Asset (Short-term or Long-term Capital Asset):
The AO and CIT(A) held that the freehold rights acquired in 2007 constituted a short-term capital asset, thus enhancing the capital gain. The appellant contended that the conversion from leasehold to freehold was a qualitative improvement, not creating a new capital asset. The Tribunal referenced the Delhi High Court's judgment in CIT Vs. Frick India Ltd., which clarified that the period of holding should include the leasehold period, making the asset a long-term capital asset. Consequently, the Tribunal held that the land sold was a long-term capital asset, and the gain should be taxed as long-term capital gain.

3. Eligibility for Indexation on the Interest Paid on Borrowed Funds:
The AO denied indexation on the borrowing costs, citing discontinuous construction and capitalization in the books only in FY 2006-07. The CIT(A) upheld this, noting the leasehold rights were canceled and restored, interrupting construction. The Tribunal disagreed, stating the borrowing costs were incurred for property development and recorded year after year, thus eligible for indexation. The Tribunal allowed the appellant's claim for indexation on borrowing costs.

4. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings as premature.

Conclusion:
The appeal was partly allowed, with the Tribunal ruling that the land sold was a long-term capital asset and the appellant was entitled to indexation on borrowing costs. The penalty proceedings ground was dismissed as premature.